31.5% Annual Net Gains From 10 Russell Index Dogs?

by: Fredrik Arnold

A once per year trading system triggered by yield, called the "Dogs of the Index," gives investors the tactical advantage of obtaining all the wisdom and knowledge of well-paid wizards of investment and publishing for free, merely by choosing an existing collection of equities built by those experts.

This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book "Beating The Dow" (HarperCollins, 1991), revealed how low yielding stocks whose prices increase (and whose dividend yields, therefore, decrease) could be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index. Charts below display a snapshot of the Russell 1000 Index as of October 5, 2012 to 2013.

Modified Dogs of the Index Metrics Selected 10 Top Net Gain Russell 1000 Stocks

Russell Investments states that the Russell 1000 Index offers investors access to the extensive large-cap segment of the U.S. equity universe, representing approximately 90% of the U.S. market.

Listed below are the top 30 Russell 1000 stocks by net gain as of 10/5/12, per Yahoo Finance data. These equities were ranked using the two key dog performance metrics: (1) annual projected dividend; (2) stock price. Dividing the annual dividend by the price declared the percentage yield by which each dividend dog stock was primarily ranked. Then, (3) one year mean target price estimates by analysts supplemented 24 equities that showed significantly higher prices for 2013.

A hypothetical $1000 investment in each equity was divided by the current share price to find a number of shares purchased. The number of shares was then multiplied by a projected annual per share dividend amount to find a dividend return dollar amount. Thereafter, one-year mean target prices multiplied by the number of shares supplemented the dividend amount, minus a flat $20 broker fee, to determine a net gain amount for the 27 stocks showing upside price gains into 2013.

Top Net Gain Russell 1000 Dividend Dogs

(click images to enlarge)

The top 10 RUSSELL 1000 stocks ranked by 2013 net gains encompass six of nine sectors. Top dog Hillshire Brands (NYSE:HSH) (formerly Sara Lee) is one of three in consumer goods. It is followed by the first of two services representatives, R.R. Donnelley & Sons (NASDAQ:RRD).

Cliff's Natural Resources (NYSE:CLF) is the lone basic materials firm in the top 10. The second services firm in the top 10 is Southwest Airlines Co. (NYSE:LUV).

Two more consumer goods firms show up thereafter: Pitney Bowes, Inc. (NYSE:PBI) and Lorillard, Inc. (NYSE:LO). The first of two technology firms, Garmin Ltd. (NASDAQ:GRMN), is followed by the lone utility, AGL Resources, Inc. (NYSE:GAS), which is followed by the lone top ten financial firm, NYSE Euronext (NYSE:NYX).

The tenth slot is filled by the second technology firm, CenturyLink, Inc. (NYSE:CTL). This completes the Russell top 10 targeted net gain dogs as selected by analysts. Give them all a good scratch behind the ears.

Dividend Vs. Price Results

Below are the relative strengths of the top 10 Russell dividend dogs by net gain as of market close 10/5/2012. Historic projected annual dividend history from $1000 invested in each of the 10 highest yielding stocks and the total single share prices of those 10 stocks created the data points shown in green for price and blue for dividends.

Conclusion: Russell Net Gain Dogs Are Very Bullish

The post-September collection of Russell 1000 equities filtered for maximum net gains continued a bullish trend that began in January, but really took off since July, as measured by dividend vs. price performance. Aggregate single share price for the top 10 is up 128% since July. Meanwhile, projected dividends from those top 10 invested at $1000 each decreased 53% between July and September.

Russell 1000 index net gainers move toward convergence exhibited by the whole index since January, as aggregate total single share price rose 153%, while dividends from $1000 invested in the top 10 fell 58.8% to move within $166 of convergence

Conclusion Two: 2013 Expects Over 31.5% Net Gain From These 10 Dogs

Top 10 Russell 1000 net gainer dogs were graphed below to show relative strengths by dividend and price as of October 5, 2012, and those projected by analyst mean price target estimates to the same date in 2013.

Historic prices and actual dividends paid from $1000 invested in the 10 highest yielding stocks and the aggregate single share prices of those 10 stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1000 invested in the 10 highest yielding stocks and aggregate one-year analyst mean target prices as reported by Yahoo Finance created the 2013 data points -- green for price and blue for dividends. Note: one-year target estimated prices at or below current price were not included in the tally.

For the coming year, Yahoo Finance projected a 19% lower dividend from $1000 invested in each stock within this top net Russell group, while aggregate single share price for the 10 was projected by analysts to increase by 24%. According to analyst projections, Russell 1000 index top net gainers move past convergence in 2013 by $5.

All 10 make probable profit-generating trades as revealed by Yahoo Finance for 2013. Those trades are:

  • Hillshire Brands (Sara Lee), netting $826.85 based on mean target pricing set by nine analysts;
  • R.R. Donnelley & Sons, netting $580.36 based on mean target pricing set by 24 analysts;
  • Caterpillar, netting $229.06 based on mean target pricing set by four analysts;
  • Cliff's Natural Resources, netting $405.70 based on mean target pricing set by 16 analysts;
  • Southwest Airlines, netting $224.15 based on mean target pricing set by 14 analysts;
  • Pitney Bowes, Inc., netting $210.99 based on mean target pricing set by four analysts;
  • Lorillard, Inc., netting $206.04 based on mean target pricing set by nine analysts;
  • Garmin, Inc., netting $183.14 based on mean target pricing set by nine analysts;
  • AGL Resources, Inc., netting $174.67 based on mean target pricing set by two analysts;
  • NYSE Euronext, netting $174.67 based on mean target pricing set by 16 analysts;
  • CenturyLink, Inc., netting $172.62 as of next October, based on a mean target price set by 30 analysts.

This portfolio of Russell dividend paying stocks based on analyst one-year mean price target estimates revealed a configuration of equities estimated to net a return 31.59%, versus a 5.52% return from dividends alone. This result is calculated to be 73% more rewarding than that detailed in the "Dogs of the Index" strategy described in a separate article, titled: "Russell 1000 Top Dogs To Net 18.25% Annual Gain".

You are invited to check it out.

Disclaimer: This article is for informational and educational purposes only, and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article, except as noted, are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.